INVESTMENT IDEA 24 May 2016

PCG RESEARCH
Greaves Cotton Ltd

Industry CMP Recommendation Add on Dips to band Target Time Horizon

Capital Goods Rs. 136 BUY Rs. 136-125 Rs. 155, Rs 170 1 Year

HDFC Scrip Code GRELTDEQNR Greaves Cotton Limited is one of India's leading and well-diversified engineering companies with core competencies in
BSE Code 501455 diesel/ petrol engines, farm equipment and gensets. The Company sustains its leadership through seven manufacturing
units which produce world class products backed by comprehensive marketing and service/ parts network.
NSE Code GREAVESCOT
Investment Rationale:
Bloomberg GRV IN
Despite two deficient monsoons, Greaves Cotton sustained its revenues and cash flows. With expectation of good monsoons
CMP as on 24 May16 136
and robust economic growth ahead, we believe Greaves Cotton in all set to move to higher level of growth.
Equity Capital (Rs Cr) 48.8
Face Value (Rs) 2 Strong demand from international markets on back of rising demand for last-mile connectivity (owing to lack of well-
developed public transport system) in emerging markets in Africa and South-East.
Equity O/S (Cr) 24.4
Market Cap (Rs Cr) 3320 Once quadricycle is launched in Indian market, we expect the company to be its biggest beneficiary. It is ready with a 265cc
Book Value (Rs) 35 engine for Quadricycle to cater to the needs of OEMs who intend introduce it in the market.
Avg. 52 Week
205757 The Company continues to strengthen and invest in R&D and new product capabilities. It is among the top three players in
Volumes
farm equipment segment wherein it offers wide array of products such as portable engines, pump sets, power tiller, etc.
52 Week High 162
52 Week Low 114 The company in the recent years has strengthened its manufacturing capabilities to introduce various mechanized farming
equipment. The company sees this segment as a huge opportunity in India as people are shifting towards mechanized work
from manual work. As per capita income rises across the board, and manual labour becomes scares and costly, we see huge
Shareholding Pattern (%) opportunity for mechanization across the farms. Expect this segment to become a large growth driver for company’s
Promoters 51.0 revenues going ahead.
Institutions 37.7
Risk & Concerns:
Non Institutions 11.3
The delay in the economic recovery or unfavorable monsoon can hinder the company’s growth.
Total 100.0
Any regulatory changes can affect the product launches.
Relationship with OEMs
View & Valuation:
Krinal Shah
At CMP Rs 136, the stock is trading at 12.8x of its FY18E EPS of Rs 10.6. We recommend investors to buy the stock in the
Krinal.shah@hdfcsec.com
range of Rs 136-125 with a target of Rs. 155 and 170 in a year’s time.

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Financial Summary

(Rs Cr) FY14 FY15 FY16P FY17E FY18E

Sales 1735.9 1697.7 1618.9 1783.0 1977.1
EBITDA 187.7 199.1 269.1 336.5 407.2
Net Profit 123.4 83.6 200.4 214.4 259.2
Adj Net Profit 115.5 146.7 175.2 214.4 259.2
EPS (Rs) 4.7 6.0 7.2 8.8 10.6
P/E 28.8 22.6 19.0 15.5 12.8
EV/EBITDA 17.6 16.6 12.3 9.8 8.1
Source: Company, HDFC sec Research

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Business Background:
Greaves Cotton Limited is one of India's leading and well-diversified engineering companies with core competencies in
diesel/ petrol engines, farm equipment and gensets. The Company sustains its leadership through seven manufacturing
units which produce world class products backed by comprehensive marketing and service/ parts network. The engine
business accounted for 55-60% of total sales, farm accounted for 12-13%, genset also accounted for 12-13% and
aftermarket accounted for 17-18% of sales.
The business operations of the Company are divided into various businesses strategically structured to ensure maximum
focus on each business area and yet retain a unique synergy in the operations:
Product Profile:

PRODUCTS: Petrol / Kerosene - Engines, Petrol / Kerosene - Pumpsets, Diesel

Pumpsets
RANGE: 1 to 4 HP, 1.5 to 4 HP, 3.5 to 10 HP
Farm Equipment
APPLICATIONS / INDUSTRY: Vibrators, Sprayers, Lawn Mowers Power Ploughs,
Self Priming Pumps etc.
MANUFACTURED BY: Ranipet

PRODUCTS: Diesel / Gasoline Engines

RANGE: 4.4 to 20 HP
Automotive Engines APPLICATIONS / INDUSTRY: Automotive Engines
MANUFACTURED BY: Aurangabad and Ranipet

PRODUCTS: Gensets Dual Fuel Engines / Gensets

RANGE: 500 VA to 500 KVA Single Unit 750 VA to 2500 KVA in Parallel Running
Auxiliary Power
APPLICATIONS / INDUSTRY: Retail Outlets, Commercial Complexes Hotels
Hospitals, Small and Medium Enterprises etc.
MANUFACTURED BY: Pune

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PRODUCTS: Diesel Engines

Industrial Engines
RANGE: 1.4 to 1000 HP
APPLICATIONS / INDUSTRY: Agricultural Equipment Fire Fighting Equipment
Mining and Construction Material Handling (Cranes), Forklifts Rail Cars, Road
Sweepers, etc.
MANUFACTURED BY: Pune, Aurangabad and Ranipet

Source: Company, HDFC sec Research

INVESTMENT RATIONALE:

Agriculture - A Focused Segment to Accelerate

Greaves Cotton is among the top three players in farm equipment segment wherein it offers wide array of products such as
portable engines, pump sets, power tiller, etc. In pump sets it enjoys more than 40% market share, while in power tiller it is
in top 3 players with 16-17% market share. The company in the recent years has strengthened its manufacturing
capabilities to introduce various mechanized farming equipment. The company sees this segment as a huge opportunity in
India as people are shifting towards mechanized work from manual work. The company is concentrating on this segment
through strengthening R&D and a range of new products or solutions that will be introduced in the next two years to suit
various crop cycles. A cheerful monsoon after two consecutive droughts would accelerate further business opportunities
for the company in this segment. With the forecast of a normal monsoon, it has readied a range of products that will be
launched during the year.
Auto segment to drive the growth
Automotive segment contributes about 55%-60% of the company’s revenues. The segment manufactures highly fuel
efficient, light weight diesel / gasoline engines for automotive applications like 3-wheelers and small 4-wheeled commercial
vehicles. These 3-4 wheeler engines contribute more than 75% of the company’s total engine volume of which Piaggio is a
major OEM along with M&M, TVS Motor, Tata Motor and Atul Auto.
During FY06-16, the 3 wheelers industry has grown at 8% CAGR driven by both domestic demand as well as exports. In FY16
the growth remained mute as demand fell due to lack of fresh permits being issued by various Road Transport Authorities
(RTAs) unlike in the previous year, however the volumes are expected to recover and clock 8-10% growth in FY17 on back of
structurally favorable growth drivers and improving distribution reach of Indian OEMs., according to the ICRA report.

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The top-three players such as Bajaj Auto, Piaggio and Mahindra and Mahindra accounted for 87% of the industry in FY2016,
while the company’s major clients account for more than 40% of industry volume that will drive the company’s growth as
soon as the industry will revive. With the rapid urbanization and last mile transportation policy, the three wheeler industry
will report a steady growth going ahead. The SCV segment would also accelerate along with the revival in industrial
activities.

Strong demand would arise from international markets on back of rising demand for last-mile connectivity (owing to lack of
well-developed public transport system) in emerging markets in Africa and South-East.

3 Wheelers Sales Volume (Company wise,%)

Source: Bloomberg, HDFC sec Research

Ready with BS IV Standards

The company is well placed to implement the BS IV norms for 4-wheelers and 3-wheelers in 2016-17 and is confident of
providing the necessary solutions to meet BS VI norms by working closely with its OEMs, suppliers and technology
specialists. Bharat Stage emission standards, introduced in 2000, are emission standards that have been set up the Central
government to regulate the output of air pollutants from internal combustion engine equipment, including motor vehicles.
The Bharat Stage (BS) norms are based on European regulations. In 13 major cities, Bharat Stage IV emission standards
were put in place in April 2010 and they are supposed to come into effect nationwide from April 2017. Further, the

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government of India instructed to implement BS VI emission norms by April 1, 2020. The new emission upgrade projects will
ensure longevity of the company’s existing product line-up.

Expanding the Product Line

The company is working on new products and also is in conversation with new OEM customers. The company recently
launched 1.5-litre, 3-cylinder, 105bhp diesel engine developed for passenger car as well as light CV applications for which it
received a good response. While the design is ready, it plans to build capacity as and when demand arises from a customer.
The company is ready with a 265cc engine for Quadricycle to cater to the needs of OEMs who intend introduce it in the
market.

Improving Financials

The Company’s focus is on improving profitability by exiting non-core and loss-making businesses and tightening financial
management. Following which, the Company closed manufacturing operations of its Construction Equipment business in
FY15 due to non-viability of operations on account of its continuing losses. Though the Company has exited this business in
terms of its own manufacturing facilities, it is considering the option of going the trading and contract manufacturing way,
leveraging the technology and expertise, which it still owns.

Revenue during FY16 remained subdued at Rs 1619 Cr vs Rs 1698 Cr of FY15, however PAT jumped to Rs 200 Cr against Rs.
84 cr in the previous year on improved margin. Its continued focus on margin enhancement resulted into a sharp
improvement in its EBITDA Margin in FY16 to 17% from 12% a year ago. The revival in the economic and industrial activities
would accelerate the topline of the company going ahead while cost control initiatives would boost up the margins.

International business also continued to grow in selected markets of Middle East, SAARC and South East Asia. The Company
consolidated its position in SAARC by retaining its position as a supplier of quality products in Farm Equipment and Auxiliary
Power businesses. The export contributes 4-5% of its turnover at present that the company is targeting to take to 10% in
the next 2-3 years.
Risk & Concerns:
The delay in the economic recovery or unfavorable monsoon can hinder the company’s growth.
Any regulatory changes can affect the product launches.
Relationship with OEMs

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VIEW & VALUATION:

Despite two deficient monsoons, Greaves Cotton sustained its revenues and cash flows. With expectation of good
monsoons and robust economic growth ahead, we believe Greaves Cotton in all set to move to higher level of growth.

Strong demand would arise from international markets on back of rising demand for last-mile connectivity (owing to lack of
well-developed public transport system) in emerging markets in Africa and South-East.

Once quadricycle is launched in Indian market, we expect the company to be its biggest beneficiary. It is ready with a 265cc
engine for Quadricycle to cater to the needs of OEMs who intend introduce it in the market.

The Company continues to strengthen and invest in R&D and new product capabilities. It is among the top three players in
farm equipment segment wherein it offers wide array of products such as portable engines, pump sets, power tiller, etc.

The company in the recent years has strengthened its manufacturing capabilities to introduce various mechanized farming
equipment. The company sees this segment as a huge opportunity in India as people are shifting towards mechanized work
from manual work. As per capita income rises across the board, and manual labour becomes scares and costly, we see huge
opportunity for mechanization across the farms. Expect this segment to become a large growth driver for company’s
revenues going ahead.

At CMP Rs 136, the stock is trading at 12.8x of its FY18E EPS of Rs 10.6. We recommend investors to buy the stock in the
range of Rs 136-125 with a target of Rs. 155 and 170 in a year’s time.

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Income Statement (Consolidated) Balance Sheet (Consolidated)

(Rs Cr) FY14 FY15 FY16P FY17E FY18E (Rs Cr) FY14 FY15 FY16P FY17E FY18E
Net Revenue 1735.9 1697.7 1618.9 1783.0 1977.1 SOURCE OF FUNDS
Growth (%) -8.9 -2.2 -4.6 10.1 10.9 Share Capital 49 49 49 49 49
Operating Expenses 1548.2 1498.6 1349.7 1446.5 1569.9 Reserves 771 774 811 939 1111
EBITDA 187.7 199.1 269.1 336.5 407.2 Shareholders' Funds 820 823 860 988 1160
Growth (%) -22.0 6.1 35.2 25.0 21.0 Total Debt 0 0 0 0 0
EBITDA Margin (%) 10.8 11.7 16.6 18.9 20.6 Net Deferred Taxes 33 13 19 19 19
Depreciation 44.6 47.7 45.7 48.5 53.8 Long Term Provisions &
17 14 12 15 15
EBIT 143.1 151.4 223.4 287.9 353.4 Others
Net Operating Income 36.9 -38.1 70.8 25.0 25.0 Total Source of Funds 870 850 891 1021 1194
Interest 4.9 2.4 1.0 0.0 0.0 APPLICATION OF FUNDS
PBT 175.1 111.0 293.2 312.9 378.4 Net Block 376 335 312 338 360
Tax 51.7 27.3 92.7 98.6 119.2 Long Term Loans & Advances 29 33 31 32 32
RPAT 123.4 83.6 200.4 214.4 259.2 Total Non Current Assets 404 368 343 370 392
APAT 115.5 146.7 175.2 214.4 259.2 Investment 181 293 356 420 499
Growth (%) -23.8 27.0 19.4 22.4 20.9 Inventories 163 106 108 137 162
EPS 4.7 6.0 7.2 8.8 10.6 Trade Receivables 326 231 205 234 271
Source: Company, HDFC sec Research Cash & Equivalents 34 36 21 56 88
Other Current Assets 95 91 144 115 121
Total Current Assets 799 757 835 962 1141
Trade Payables 186 146 161 177 195
Other Current Liab &
147 128 126 135 144
Provisions
Total Current Liabilities 333 274 287 312 339
Net Current Assets 465 482 548 650 802
Total Application of Funds 870 850 891 1021 1194
Source: Company, HDFC sec Research

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Cash Flow Statement (Consolidated) Key Ratio (%)

(Rs Cr) FY14 FY15 FY16P FY17E FY18E Key Ratios (%) FY14 FY15 FY16P FY17E FY18E
Reported PBT 175.1 111.0 293.2 312.9 378.4 EBITDA Margin 10.8 11.7 16.6 18.9 20.6
Non-operating & EO items -54.2 -47.7 -50.8 -25.0 -25.0 EBIT Margin 8.2 8.9 13.8 16.1 17.9
Interest Expenses 4.9 2.4 1.0 0.0 0.0 APAT Margin 6.7 8.6 10.8 12.0 13.1
Depreciation 44.6 47.7 45.7 48.5 53.8 RoE 14.9 17.9 20.9 23.3 24.2
Working Capital Change -120.5 -43.0 -73.9 -66.3 -120.1 RoCE 17.4 17.7 25.8 30.3 32.0
Tax Paid -51.7 -27.3 -92.7 -98.6 -119.2 Net D/E 0.0 0.0 0.0 0.0 0.0
OPERATING CASH FLOW ( a ) -1.7 43.0 122.4 171.6 167.9 PER SHARE DATA
Capex -14.0 8.6 -23.0 -75.0 -75.0 EPS 4.7 6.0 7.2 8.8 10.6
Free Cash Flow -15.7 51.5 99.4 96.6 92.9 CEPS 6.6 8.0 9.0 10.8 12.8
Investments 20.8 0.0 0.0 0.0 0.0 BV 33.4 33.5 35.0 40.3 47.4
Non-operating income 29.0 24.9 45.5 25.0 25.0 Dividend 1.3 2.5 5.5 3.0 3.0
INVESTING CASH FLOW ( b ) 35.7 33.5 22.5 -50.0 -50.0 VALUATION
Debt Issuance / (Repaid) -0.1 0.0 0.0 0.0 0.0 P/E 28.8 22.6 19.0 15.5 12.8
Interest Expenses -4.9 -2.4 -1.0 0.0 0.0 P/BV 4.1 4.1 3.9 3.4 2.9
FCFE -20.7 49.1 98.4 96.6 92.9 EV/EBITDA 17.6 16.6 12.3 9.8 8.1
Share Capital Issuance 0.0 0.0 0.0 0.0 0.0 EV / Revenues 1.9 1.9 2.0 1.9 1.7
Dividend -37.1 -72.5 -158.5 -86.4 -86.4 Dividend Yield (%) 1.0 1.8 4.0 2.2 2.2
FINANCING CASH FLOW ( c ) -42.1 -74.9 -159.5 -86.4 -86.4 Source: Company, HDFC sec Research
NET CASH FLOW (a+b+c) -8.1 1.6 -14.6 35.1 31.5
Closing Cash 34.2 35.8 21.2 56.3 87.8
Source: Company, HDFC sec Research

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Rating Definition:

Buy: Stock is expected to gain by 10% or more in the next 1 Year.

Sell: Stock is expected to decline by 10% or more in the next 1 Year.

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I, Krinal Shah, MBA, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s)
or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
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Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock – No

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